Overview
Trans-Lux is a leading supplier of LED technology for display applications. The
essential elements of these systems are the real-time, programmable digital
products that we design, manufacture, distribute and service. Designed to meet
the digital signage solutions for any size venue's indoor and outdoor needs,
these displays are used primarily in applications for the financial, banking,
gaming, corporate, advertising, transportation, entertainment and sports
markets. The Company operates in two reportable segments: Digital product sales
and Digital product lease and maintenance.
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The Digital product sales segment includes worldwide revenues and related
expenses from the sales of both indoor and outdoor digital product signage.
This segment includes the financial, government/private, gaming, scoreboards and
outdoor advertising markets. The Digital product lease and maintenance segment
includes worldwide revenues and related expenses from the lease and maintenance
of both indoor and outdoor digital product signage. This segment includes the
lease and maintenance of digital product signage across all markets.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's Consolidated Financial Statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. On an ongoing
basis, management evaluates its estimates and judgments, including those related
to uncollectible accounts receivable, slow-moving and obsolete inventories,
rental equipment, goodwill, income taxes, warranty reserve, warrants, pension
plan obligations, contingencies and litigation. Management bases its estimates
and judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions. Management has
discussed the development and selection of these accounting estimates and the
related disclosures with the Audit Committee of the Board of Directors.
Management believes the following critical accounting policies, among others,
involve its more significant judgments and estimates used in the preparation of
its Consolidated Financial Statements:
Uncollectible Accounts Receivable: The Company maintains allowances for
uncollectible accounts receivable for estimated losses resulting from the
inability of its customers to make required payments. Should non-payment by
customers differ from the Company's estimates, a revision to increase or
decrease the allowance for uncollectible accounts receivable may be required.
Slow-Moving and Obsolete Inventories: The Company writes down its inventory for
estimated obsolescence equal to the difference between the carrying value of the
inventory and the estimated net realizable value based upon assumptions about
future demand and market conditions. If actual future demand or market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required.
Rental Equipment: The Company evaluates rental equipment assets for possible
impairment annually to determine if the $656,000 carrying amount of such assets
may not be recoverable. The Company uses a cash flow model to determine the
fair value under the income approach, based on the remaining lengths of existing
leases. Changes in the assumptions used could materially impact our fair value
estimates. Assumptions critical to our fair value estimates are projected
renewal rates and CPI rate changes. These and other assumptions are impacted by
national and global economic conditions including changes in national and
international interest rates, taxes, inflation, etc. and will change in the
future based on period-specific facts and circumstances, thereby possibly
requiring an impairment charge in the future. The December 31, 2020 impairment
analysis included a renewal rate estimate of 92.1% and a CPI rate change of
approximately 1.5%, which were the actual average rates for the two-year period
ended December 31, 2020. Based on these assumptions, the cash flow model
determined a fair value of $7.8 million, exceeding its carrying value by 1087%.
Therefore there is no impairment of the Rental Equipment. For every
1-percentage-point change in the renewal rate, the valuation would change by
approximately $182,000. For every 0.1-percentage-point change in the CPI rate,
the valuation would change by approximately $16,000.
Rental equipment is comprised of installed digital products on lease primarily
used for indoor trading applications, time and temperature displays and other
digital message displays and have estimated useful lives of 10-15 years. For
example, the Company is party to contracts for equipment originally installed
over 30 or 40 years ago in the 1970's and 1980's, as well as dozens of
installations from the 1990's still in operation. Current contracts have an
average age of 21.0 years from their installation dates through the expiration
of their current terms.
Goodwill: The Company evaluates goodwill for possible impairment annually and
when events or changes in circumstances indicate that the carrying amount may
not be recoverable. The Company had $744,000 of goodwill related to its digital
product sales reporting unit. The Company used the income and the market
approach to test for impairment of its goodwill, and considers other factors
including economic trends and our market capitalization relative to net book
value. The Company weighed these approaches by using a 90% factor for the
income approach and a 10% factor for the market approach. Together these two
factors estimate the fair value of the reporting unit. The Company used a
discounted cash flow model to determine the fair value under the income approach
which contemplates an overall weighted average revenue growth rate. The Company
used a market multiple approach based on revenue to determine the fair value
under the market approach which includes a selection of and market price of a
group of comparable companies and the performance of the guidelines of the
comparable companies and of the reporting unit. The October 1, 2020 annual
review indicated that the fair value of the reporting unit did not exceed the
carrying value. Therefore, there was an impairment of goodwill related to our
digital product sales reporting unit. As a result, the Company wrote off the
$744,000 of goodwill in the year ended December 31, 2020.
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Restricted Cash: The Company classifies cash as restricted when the cash is
unavailable for withdrawal or usage for general operations. Restrictions may
include legally restricted deposits, contracts entered into with others, or the
Company's statements of intention with regard to particular deposits. In May
2017, the Company deposited $650,000 in a savings account as collateral for a
letter of credit in favor of the City of Hazelwood, Missouri as collateral for a
forgivable loan. In July 2020, the loan was terminated and the restricted cash
was used to pay off the loan in full.
In July 2016, the Company deposited $400,000 in a savings account as collateral
for a letter of credit in favor of the landlord at its Hazelwood, Missouri
manufacturing facility as a security deposit. In October 2017, the security
deposit was reduced by $100,000 to $300,000, in October 2018, the security
deposit was reduced by $50,000 to $250,000, and in October 2019, the security
deposit was reduced by an additional $50,000 to $200,000, so the related letter
of credit and savings account deposit were also reduced. Due to cash
constraints in 2020 due to the COVID-19 pandemic, the landlord allowed the
Company to apply the security deposit against current rent payments, so the
security deposit was reduced from $200,000 to zero. The Company has presented
these funds in Restricted cash in the Consolidated Balance Sheets since the use
of the funds under the letters of credit is restricted.
Income Taxes: The Company records a valuation allowance to reduce its deferred
tax assets to the amount that it believes is more likely than not to be
realized. While the Company has considered future taxable income and ongoing
feasible tax planning strategies in assessing the need for the valuation
allowance, in the event the Company were to determine that it would not be able
to realize all or part of its net deferred tax assets in the future, an
adjustment to the deferred tax assets would be charged to income in the period
such determination was made. Likewise, should the Company determine that it
would be able to realize its deferred tax assets in the future in excess of its
net recorded amount, an adjustment to the deferred tax assets would increase
income in the period such determination was made.
Warranty Reserve: The Company provides for the estimated cost of product
warranties at the time revenue is recognized. While the Company engages in
product quality programs and processes, including evaluating the quality of the
component suppliers, the warranty obligation is affected by product failure
rates. Should actual product failure rates differ from the Company's estimates,
revisions to increase or decrease the estimated warranty liability may be
required.
Pension Plan Obligations: The Company is required to make estimates and
assumptions to determine the obligation of our pension benefit plan, which
includes investment returns and discount rates. The Company recorded after-tax
charges in unrecognized pension liability of $755,000 and $342,000 in 2020 and
2019, respectively, in other comprehensive loss. Estimates and assumptions are
reviewed annually with the assistance of external actuarial professionals and
adjusted as circumstances change. Assumed mortality rates of plan participants
are a critical estimate in measuring the expected payments a participant will
receive over their lifetime and the amount of liability and expense we
recognize. At December 31, 2020, plan assets were invested 31.8% in fixed
income contracts and 68.2% in equity and index funds. The investment return
assumption takes the asset mix into consideration. The assumed discount rate
reflects the rate at which the pension benefits could be settled. The Company
utilizes a yield curve in lieu of a single weighted discount rate in determining
liabilities and the interest cost for the following year. At December 31, 2020,
the weighted average rates used for the computation of benefit plan liabilities
were: investment returns, 8.00% and discount rate, 3.20%. The net periodic cost
for 2021 will be based on the December 31, 2020 valuation. The defined benefit
pension plan periodic benefit (cost) was $111,000 and ($83,000) in 2020 and
2019, respectively. At December 31, 2020, assuming no change in the other
assumptions, a one-percentage point increase/(decrease) in the discount rate
would have increased/(decreased) the net periodic cost by $20,000/($32,000).
As of December 31, 2003, the benefit service under the defined benefit pension
plan had been frozen and, accordingly, there is no service cost for the years
ended December 31, 2020 and 2019. In 2020, we made contributions of $85,000 of
the plan. As allowed by the CARES Act, the Company elected to defer the payment
of the $556,000 of remaining minimum required contributions due in 2020 until
January 1, 2021. Subsequent to December 31, 2020, the Company made $56,000 of
contributions to the plan. At this time, we expect to make our remaining
minimum required contributions in 2021 of $1.0 million; however, there is no
assurance that we will be able to make any or all of such remaining payments.
See Note 15 to the Consolidated Financial Statements - Pension Plan for further
details.
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Contingencies and Litigation: The Company is subject to legal proceedings and
claims which arise in the ordinary course of its business and/or which are
covered by insurance. The Company has accrued reserves individually and in the
aggregate for such legal proceedings. Should actual litigation results differ
from the Company's estimates, revisions to increase or decrease the accrued
reserves may be required. There are no open matters that the Company deems
material.
Results of Operations
The following table presents our Statements of Operations data, expressed as a
percentage of revenue for the years ended December 31, 2020 and 2019:
In thousands, except percentages 2020 2019
Revenues:
Digital product sales $ 7,378 78.1 % $ 14,710 86.4 %
Digital product lease and maintenance 2,067 21.9 % 2,325 13.6 %
Total revenues 9,445 100.0 % 17,035 100.0 %
Cost of revenues:
Cost of digital product sales 9,525 100.9 % 12,273 72.1 %
Cost of digital product lease and maintenance 628 6.6 % 775 4.5 %
Total cost of revenues
10,153 107.5 % 13,048 76.6 %
Gross (loss) profit from operations (708) (7.5) % 3,987 23.4 %
General and administrative expenses (3,908) (41.4) % (4,438) (26.0) %
Operating loss (4,616) (39.1) % (451) (2.6) %
Interest expense, net (425) (4.5) % (504) (3.0) %
Loss on foreign currency remeasurement (57) (0.6) % (130) (0.8) %
Gain (loss) on extinguishment of debt 137 1.4 % (193) (1.1) %
Pension benefit (expense) 111 1.2 % (83) (0.5) %
Loss before income taxes (4,850) (41.6) % (1,361) (8.0) %
Income tax benefit (expense) 7 0.1 % (41) (0.2) %
Net loss $ (4,843) (41.5) % $ (1,402) (8.2) %
2020 Compared to 2019
Total revenues for the year ended December 31, 2020 decreased $7.6 million or
44.6% to $9.4 million from $17.0 million for the year ended December 31, 2019,
primarily due to decreases in Digital product sales.
Digital product sales revenues decreased $7.3 million or 49.8% to $7.4 million
for the year ended December 31, 2020 compared to $14.7 million for the year
ended December 31, 2019, primarily due to the onset of the coronavirus pandemic.
Digital product lease and maintenance revenues decreased $258,000 or 11.1% to
$2.1 million for the year ended December 31, 2020 compared to $2.3 million for
the year ended December 31, 2019, primarily due to the continued expected
revenue decline in the older outdoor display equipment rental and maintenance
bases acquired in the early 1990s. The financial services market continues to
be negatively impacted by the current investment climate resulting in
consolidation within that industry and the wider use of flat-panel screens for
smaller applications.
Total operating loss for the year ended December 31, 2020 increased $4.2 million
to $4.6 million from $451,000 for the year ended December 31, 2019, principally
due to the decrease in revenues and an increase in the cost of revenues as a
percentage of revenues.
Digital product sales operating income (loss) decreased $5.4 million to a loss
of $5.2 million for the year ended December 31, 2020 compared to income of
$183,000 for the year ended December 31, 2019, primarily due to the decrease in
revenues. The cost of Digital product sales decreased $2.7 million or 22.4%,
primarily due to the decrease in revenues. The cost of Digital product sales
represented 129.1% of related revenues in 2020 compared to 83.4% in 2019.
General and administrative expenses for Digital product sales increased $768,000
or 34.1%, primarily due to the write-off of goodwill and an increase in
marketing expenses, partially offset by a decrease in bad debt expenses and
employees' expenses.
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Digital product lease and maintenance operating income decreased $363,000 or
20.7% to $1.4 million for the year ended December 31, 2020 compared to $1.8
million for the year ended December 31, 2019, primarily due to a decrease in the
cost of Digital product lease and maintenance and a decrease in general and
administrative expenses. The cost of Digital product lease and maintenance
decreased $147,000 or 19.0%, primarily due to a decrease in depreciation
expense. The cost of Digital product lease and maintenance revenues represented
30.4% of related revenues in 2020 compared to 33.3% in 2019. The cost of
Digital product lease and maintenance includes field service expenses, plant
repair costs, maintenance and depreciation. General and administrative expenses
for Digital product lease and maintenance increased $252,000 to $50,000 for the
year ended December 31, 2020, primarily due to an increase in bad debt expenses.
Corporate general and administrative expenses decreased $1.6 million or 65.0% to
$836,000 for the year ended December 31, 2020 compared to $2.4 million for the
year ended December 31, 2019, primarily due to a reduction in relocation,
employee, rent, legal and directors' expenses, partially offset by an increase
in warrant expense.
Net interest expense decreased $79,000 or 15.7% to $425,000 for the year ended
December 31, 2020 compared to $504,000 for the year ended December 31, 2019,
primarily due to decreases in interest rates and the average outstanding
long-term debt, primarily due to the decrease in the balance owed under
revolving credit loans and term loans, partially offset by the new borrowing
under the Paycheck Protection Program ("PPP") loan.
The gain on extinguishment of debt for the year ended December 31, 2020
represented the reversal of accrued interest on the Hazelwood loan, which was
terminated in July 2020. The loss on extinguishment of debt for the year ended
December 31, 2019 represented the write-off of the remaining debt discount costs
and the termination fees related to the CNH and SM Investors loans, partially
offset by the gain on the extinguishment of $35,000 of Notes.
The effective tax rate for the years ended December 31, 2020 and 2019 was a
benefit (expense) of 0.1% and (3.0%), respectively. In 2020 and 2019, the
Company recognized income tax benefit (expense) of $7,000 and ($41,000),
respectively. The income tax expense in 2020 and 2019 is affected by income tax
expense related to the Company's Canadian subsidiary and the valuation allowance
on the Company's deferred tax assets as a result of reporting pre-tax losses.
Liquidity and Capital Resources
Current Liquidity
The Company has incurred recurring losses and continues to have a working
capital deficiency. The Company incurred a net loss of $4.8 million in the year
ended December 31, 2020 and had a working capital deficiency of $6.3 million as
of December 31, 2020. As of December 31, 2019, the Company had a working
capital deficiency of $3.1 million. The increase in the working capital
deficiency as compared to December 31, 2019 is primarily due to increases in the
current portion of long-term debt, customer deposits and accounts payable, as
well as decreases in receivables, cash, inventories and prepaids and other
assets, partially offset by a decrease in accrued liabilities.
The Company is dependent on future operating performance in order to generate
sufficient cash flows in order to continue to run its businesses. Future
operating performance is dependent on general economic conditions, as well as
financial, competitive and other factors beyond our control. In order to more
effectively manage its cash resources, the Company had, from time to time,
increased the timetable of its payment of some of its payables, which had, from
time to time, delayed certain product deliveries from our vendors, which in turn
had, from time to time, delayed certain deliveries to our customers. The recent
cash infusions have resolved these previous issues.
Management believes there is substantial doubt as to whether we will have
adequate liquidity, including access to the debt and equity capital markets, to
operate our business over the next 12 months from the date of issuance of this
Form 10-K. The Company continually evaluates the need and availability of
long-term capital to meet its cash requirements and fund potential new
opportunities.
The Company used cash for operating activities of $1.9 million and $4.3 million
in the years ended December 31, 2020 and 2019, respectively. The Company has
implemented several initiatives to improve operational results and cash flows
over future periods, including reducing headcount, reorganizing its sales
department and outsourcing certain administrative functions. The Company
continues to explore ways to reduce operational and overhead costs. The Company
periodically takes steps to reduce the cost to maintain the digital products on
lease and maintenance agreements.
Cash, cash equivalents and restricted cash decreased $1.3 million in 2020. The
decrease is primarily attributable to cash used in operating activities of $1.9
million, the paydown of $650,000 on the Hazelwood loan and investments in
equipment for rental, property and equipment of $190,000, partially offset by
borrowing on the revolving loan of $612,000 and proceeds from the PPP loan of
$811,000. The Company will apply for forgiveness of all or some of the PPP
loan. The current economic environment has increased the Company's trade
receivables collection cycle, and its allowances for uncollectible accounts
receivable, but collections continue to be favorable.
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Under various agreements, the Company is obligated to make future cash payments
in fixed amounts. These include payments under the Company's long-term debt
agreements, payments to the Company's pension plan, employment agreement
payments, warranty liabilities and rental payments required under operating
lease agreements. The Company has both variable and fixed interest rate debt.
Interest payments are projected based on actual interest payments incurred in
2020 until the underlying debts mature.
The following table summarizes the Company's fixed cash obligations as of
December 31, 2020 over the next five fiscal years:
In thousands 2021 2022 2023 2024 2025
Long-term debt, including interest $ 3,686 $ 270 $ - $ - $ -
Pension plan payments 1,008 406 355 248 114
Employment obligations - - - - -
Estimated warranty liability 164 127 79 51 17
Operating lease payments 375 348 309 - -
Total $ 5,233 $ 1,151 $ 743 $ 299 $ 131
As of December 31, 2020, the Company still had outstanding $352,000 of Notes
which matured as of March 1, 2012. The Company also still had outstanding
$220,000 of Debentures which matured on December 1, 2012. On January 15, 2021,
the Company agreed to an exchange with a holder of $50,000 of Notes, under which
agreement the Company paid $20,000 to the holder in exchange for the principal
and the holder forgive any accrued interest. The Company continues to consider
future exchanges of the $302,000 of remaining Notes and $220,000 of remaining
Debentures, but has no agreements, commitments or understandings with respect to
any further exchanges. See Note 12 to the Consolidated Financial Statements -
Long-Term Debt for further details.
The Company may still seek additional financing in order to provide enough cash
to cover our remaining current fixed cash obligations as well as providing
working capital. However, there can be no assurance as to the amounts, if any,
the Company will receive in any such financing or the terms thereof. The
Company has no agreements, commitments or understandings with respect to any
such financings. To the extent the Company issues additional equity securities,
it could be dilutive to existing shareholders.
Pension Plan Contributions
The minimum required pension plan contribution for 2020 was $641,000, of which
the Company contributed $85,000. As allowed by the CARES Act, the Company
elected to defer the payment of the $556,000 of remaining minimum required
contributions due in 2020 until January 1, 2021. Subsequent to December 31,
2020, the Company made $56,000 of contributions to the pension benefit plan. At
this time, we expect to make our minimum required contributions to the pension
benefit plan in 2021 of $1.0 million; however, there is no assurance that we
will be able to make any or all of such remaining payments. See Note 15 to the
Consolidated Financial Statements - Pension Plan for further details.
Off-Balance Sheet Arrangements: The Company has no majority-owned subsidiaries
that are not included in the Consolidated Financial Statements nor does it have
any interests in or relationships with any special purpose off-balance sheet
financing entities.
Safe Harbor Statement under the Private Securities Reform Act of 1995
This report includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Any statement that is not a statement of
historical fact should be considered a forward-looking statement. We often use
words or phrases of expectation or uncertainty like "believe," "anticipate,"
"plan," "expect," "intent," "project," "future," "may," "will," "could," "would"
and similar words to help identify forward-looking statements. Examples of
forward-looking statements include statements regarding our future financial
results, operating results, business strategies, projected costs, product
development or future sales, competitive positions and plans and objectives of
management for future operations.
We have based these forward-looking statements on our current expectations and
projections about future events. However, they are subject to various risks and
uncertainties, many of which are outside our control, including the
circumstances described in the section entitled "Risk Factors" in this report.
Accordingly, our actual results or financial condition could differ materially
and adversely from those discussed in, or implied by, these forward-looking
statements. We caution you not to place undue reliance on our forward-looking
statements. Each forward-looking statement speaks only as of the date on which
it is made, and, except to the extent required by federal securities laws, we
undertake no obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
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